Keeping a mortgage after age 65: a no-brainer or a big risk?

Conventional wisdom dictates that retiring with debt — especially debt as large and significant as a mortgage — is financially risky at best and potentially disastrous at worst.

That's not how Brian Lindmeier sees it. “There's just no point in paying off the house at all,” he said.

Mr. Lindmeier, 80, a retired purchasing and inventory manager, and his wife Cindy, who retired from the local public school system, refinanced their home in Orange, California, in late 2020. They converted their balance into new loans with a term of 30 years and halved their interest rates to below 3 percent. Mr Lindmeier called the move a 'no brainer'.

“The money I have to take out of my savings or out of my investments earns a higher interest rate than the interest I pay on the loan,” he said.

For a growing number of older Americans, getting a mortgage that will likely outlive them makes economic sense. A significant percentage of homeowners have fixed-rate mortgages with historically low interest rates. According to online real estate brokerage Redfin, about six in ten mortgage lenders had loans with interest rates below 4 percent in the third quarter of last year. Almost a quarter had an interest rate of less than 3 percent.

A campaign of rate hikes by the Federal Reserve, aimed at curbing inflation, has pushed the returns investors can get on ultra-safe instruments such as certificates of deposit to 5 percent or higher.

Even those who have saved for years with the intention of paying off their mortgage in one go when they retire now have to do the math again. Some believe these funds could be put to better use by generating returns on other investments or helping them meet their cash flow needs for everyday expenses.

Eric Zittel, chief lending officer at Financial Partners Credit Union in Downey, California, said some of his members, including Mr. Lindmeier, are keeping their mortgages — and their cash.

“They realize that they can get a rate of 4.5 to 5 percent for a CD alone. If you do the calculations, it makes much more sense for them to keep that money.”

A number of financial advisors and retirement planners argue that the need to pay off a mortgage before retirement is an outdated axiom in the current economic climate.

“While paying off debt feels like a very conservative, safe move, trading your liquidity for a paid-off mortgage is quite risky,” says Evan Beach, president of Exit 59 Advisory, a wealth management firm focused on retirement income planning . Alexandria, Va. “You're giving up money in your pocket that you might need for something else.”

Gary Jacobs, a client of Mr. Beach and a retired federal employee, and his wife, Donna, a retired nurse, refinanced the mortgage on their home in Chevy Chase, Maryland, in late 2021, when mortgage rates were at historic levels. Through.

“Timing is everything, and this time we timed it just right,” said the 79-year-old Mr. Jacobs. Refinancing a new 30-year mortgage at an interest rate that was about half their previous rate lowered the couple's monthly payments by about $300.

“While we could have, we didn't feel like tapping into our cash reserves to pay off the mortgage,” Mr. Jacobs said, adding that paying off the mortgage would have cost about half of their savings. “We are conservative in the sense that we want to be prepared for eventualities where we need the money.”

This dynamic is one of the factors driving historically large percentages of older Americans to carry mortgage debt into their senior years a new report from Harvard University's Joint Center for Housing Studies. In 2022, researchers found that just over 40 percent of homeowners over age 64 had a mortgage, up from about 25 percent a generation ago.

Ultra-low mortgage rates were a big driver of the increase, said Jennifer Molinsky, project director of the center's housing and aging program. “We think there is a calculated financial decision for some people that they would rather keep their mortgage, even if they could pay it off, and invest it elsewhere,” she said.

But Ms. Molinsky expressed concern that the increase was accompanied by an overall rising debt burden among seniors. “There is a trend among all older adults toward higher levels of debt across the board,” she said.

The disadvantage of having a mortgage

Retirees on fixed incomes may have difficulty managing higher-interest and variable-rate debt, such as outstanding credit card balances. In the worst-case scenario, if a health crisis or the death of a spouse destabilizes their lives or their finances, older Americans are at risk of losing their homes.

“For lower-income seniors, homeownership can sometimes become a challenge because people often see a decline in income as they retire,” said Lori Trawinski, director of finance and employment at the AARP Public Policy Institute.

While the recent rise in home prices has given homeowners more equity on paper, it can pose a challenge for those on fixed incomes, as those higher valuations can lead to higher property taxes and insurance premiums.

Some senior financing and policy experts point out that because a mortgage is almost always the largest part of a homeowner's monthly expenses, homeowners in their 50s and 60s are less resilient to financial setbacks, such as those unexpected job loss or healthcare demands.

“Housing is the biggest part of that budget for anyone, so it's undoubtedly more expensive month to month to have a mortgage than it is to have a paid-off house,” says Beth Truesdale, researcher at WE Upjohn. Institute for Employment Research.

While people may plan to continue working until they can claim Social Security, Ms. Truesdale says, her research indicates that only about half of American workers stay in the workforce until age 50. This suggests that an income-reducing event is more common than many people expect. While the decline in labor force participation is more pronounced among women and less educated workers, labor force participation among all demographic groups falls by about 20 percentage points among people in their fifties.

“Even for people who start with benefits, there is no guarantee they will be able to work as long as they want,” Ms. Truesdale said.

For those who own their homes free and clear, the Joint Center for Housing Studies found that older Americans often struggle to tap into the equity in their homes. And those homes may not be as valuable as their owners think. Ms. Trawinski of the AARP said longtime homeowners might be content living with outdated kitchens or bathrooms, for example.

“It's common for people not to want to do these types of upgrades,” she says. Older homeowners may also have mobility limitations or other physical challenges that make maintaining a home more challenging.

Lower-income senior homeowners, who are more likely to be people of color, also have more difficulty affording necessary repairs and upgrades. “There is less opportunity to invest in that property and maintain it over time,” said Ms. Molinsky of the Center for Housing Studies. “People need to maintain the value of that asset if they want to use that asset later in life,” but, she added, maintenance can come at a significant cost.

The effect that housing costs can have on the average household budget may prompt some people to view a mortgage as a risky liability to take into retirement – ​​in some cases, whether that concern is justified or not, says David Frisch, founder from Frisch Financial Group. in Melville, NY

“Beyond the financial calculations, it's also psychological in terms of risks,” he said, adding that even when the math suggests holding a mortgage costs less than paying it off, some homeowners' intense aversion to debt influences their choices . “Some people don't want the mortgage payment hanging over their heads even if they make more” by keeping that money in CDs or government bonds, he said.

Some financial planners also embrace the “less debt is better” philosophy. Jamie Cox, managing partner of Harris Financial Group in Richmond, Virginia, said a homeowner's psychological approach to debt plays a role in his reluctance to encourage a customer to hold on to a mortgage.

During the financial crisis, Mr. Cox said, his clients with paid-off mortgages were more optimistic about their portfolios declining because they didn't have that liability hanging over their heads. “They are better investors because they are not afraid of losing their homes,” he said.

Find out what's best for you

No one decision will work for everyone, so financial planners suggest that homeowners who are in or near retirement should consider the specifics of their mortgage terms, cost of living and risk tolerance, along with the following points:

• If you were to take advantage of historically low interest rates to refinance, you may be able to earn a higher return by investing money intended to pay off your mortgage in safe investments such as CDs or government bonds.

• Financial advisors warn against paying off a mortgage if it would leave you with little or no emergency savings. Advisors typically recommend maintaining an emergency fund worth three to six months' worth of living expenses in cash or similar liquid instruments.

• Your personal risk tolerance matters. Saving a few hundred dollars a month shouldn't come at the expense of your peace of mind.